This Plumbing Supplier’s Stock Is a Cheap Buy

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Shares of plumbing supplier Masco have been circling the drain for a year, but at recent levels they look attractive. Housing is cooling, but fears of a sharp downturn seem overblown, especially considering the recent drop in mortgage interest rates. Trade tensions aren’t helping, but they look manageable. Perhaps most important for investors, a stock that previously traded at a premium to the broad market relative to earnings is now on offer at a sizable discount.

Based in Livonia Mich., about 30 minutes outside of Detroit,
Masco
(ticker: MAS) was once a screw supplier to car makers. In the 1950s, the company patented and brought to market something nonautomotive: a ball valve that allowed a single faucet handle to control both hot and cold water. That business became known as the Delta Faucet Company. After decades of deal making, Masco today sells an array of branded products for contractors and do-it-yourselfers, including Behr paint, KraftMaid cabinets, Milgard windows and HotSpring spas. Last year, it paid $550 million for Kichler, a maker of decorative lighting and ceiling fans.

MASBUYStock Picked Jan. 9, 2018

Price change

Jack HoughAssociate Editor
Masco, a maker of plumbing supplies, cabinets, and paint, trades at a historically deep discount to the market on fears of a housing downturn. Those fears look overblown, especially given a recent tick down in mortgage rates.

Just over half of profits come from the company’s plumbing division, which beyond faucets and spas includes shower enclosures and copper and brass fittings. Another one-third of profits come from what the company calls decorative architectural products—paints and stains, chiefly.

When Masco reports fourth-quarter results next month, Wall Street expects to see that 2018 revenue rose 9% to $8.3 billion and that earnings per share jumped 24% to $2.41. If those are indeed the numbers, it will mean earnings per share have more than tripled in the five years since Masco tapped its former plumbing and cabinet manager, Keith Allman, to become chief executive.

Rising oil prices last year had threatened to cut into margins on paint, but Brent crude has come down from over $80 last October to a recent $57 and change. A proposed expansion of tariffs on goods from China from 10% to 25% this year would have added an estimated $150 million to Masco’s costs, but that hike has been delayed, allowing for the possibility of a trade deal. Home-building has been weak, as construction companies have eyed rising mortgage rates, which make homebuying more expensive. But the Federal Reserve has signaled a more cautious pace of interest rate increases, and the 30-year mortgage rate, which hit a seven-year high of nearly 5% last fall, recently dropped to 4.5%.

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RBC Capital Markets analyst Mike Dahl raised his rating on Masco from Sector Perform to Outperform in early December, after the tariff cease-fire. On Monday, KeyBanc Capital Markets analyst Kenneth Zener upgraded a basket of housing stocks on modest valuations and a less hawkish Fed. Included was Masco, which he took to Overweight from Sector Weight. Masco sells mostly to the renovation and repair market, so it might not see the same degree of earnings upside from a pickup in home-building as, say, a builder. But then, it could also have less sensitivity in the event of a continued slump.

As things stand now, Masco is expected to grow earnings per share by 12% this year and 10% next year. The stock recently sold for less than 12 times next-four-quarter earnings forecasts. That makes it 22% cheaper than the broad
S&P 500
index, according to FactSet. On average over the past five years, Masco has traded at a 4% premium.

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